IRR-Philadelphia Mid-Year Viewpoint 2015 Local Market Report - Office
Philadelphia's stability is steering investment toward the expanding and robust Philadelphia office market. The city's CBD experienced booming transaction volume activity in 2014 over its five-year historical average -- an extraordinary increase of 223 percent, and in terms of relative market activity, the city jumped from #20 to #13 in our national averages. In addition, office vacancy and cap rates are dropping, and rents are climbing. Significant new office developments include the new Comcast Innovation and Technology Center and the FMC Tower in University City, and a number of high-profile office properties were recently transacted.
The recent flurry of transactions which closed in late 2014 and early 2015 reflect very positive numbers in key metrics, and early indicators of leasing activity in new buildings paint a bright picture for the Philadelphia office market.
As a result, investors from gateway cities are looking deeper into the Philadelphia market, and they’re investing thanks to more attractive higher yields. By the numbers: A dozen large transactions: From January 2014 to present, there were 12 class A, CBD office transactions over 500,000 square feet in Philadelphia, totaling $1.6 billion. This flurry of activity bests the peak velocity of mid-2006 through 2007, in which 10 similar-sized transactions for $1.5 billion were executed. Office space bought and sold during this new peak period includes 1515 Market St., 1635 Market St., the Penn Mutual Towers, and the Curtis Center at 170 S. Independence West. In total, more than 7.2 million square feet changed hands. A further breakdown of those numbers show the increasing demand for Philadelphia’s office: The average square foot price has risen to $223 and the cap rate now has fallen below 7% during this new peak, up from $196 per square foot and a 7%+ cap rate during the 2006-2007 boom. Philadelphia’s office market now sits in the expansion phase, and should continue this steady course as the two biggest developments -- the Comcast Innovation and Technology Center and FMC Tower – come online over the next few years. Plus, rumors are abuzz that major tech firms are looking to establish a “beach head” to be close to Comcast and their new Comcast Innovation and Technology Center. The informal “eds” and “meds” sector also continues to play a strong role in the office market, as new developments from Penn, Drexel, CHOP and Penn Medicine's Hospital of the University of Pennsylvania and Presbyterian Medical Center will come online over the next few years. Investors coming from gateway markets are finding that Philadelphia offers stability in the office market while still producing yields as high as 8%, well above their current returns. Recent findings about decreasing cap and vacancy rates, coupled with increasing rents, is making the city even more attractive to outside investors.
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IRR Mid-Year Viewpoint 2015 comprises a National Overview report and 300+ two-page Local Market Reports for all key property types as well as additional resources, including metrics methodology, graphs, and tables; these free reports may be downloaded from IRR’s site here.